Forward Volatility Agreement

Posted on Tuesday, September 21st, 2021 at 5:02 am

Volatility trading allows investors to hedge the volatility risk associated with a derivative position against adverse movements of the underlying/underlying. It also allows investors to speculate or express views on the level of volatility in the future. In fact, trade volatility is higher than Delta hedging, which uses options to get views on the future direction of volatility. FVA has nothing to do with Volswaps. This is a volatility agreement and you agree to a contract to buy/sell a vanilla forward starting option with black Scholes parameters (except for the spot price) that have been set today. I think the underlying idea is that the future ATM IV is a proxy for expected future volatility. However, ATM IV, Spot or Future, is not a good proxy for expected volatility when there is a significant correlation between the underlying and volatility. FVAs are not mentioned in Derman`s paper (“More than you ever wanted to Know about volatility swaps”) Home > Financial Encyclopedia > Derivatives > F > Forward Volatility Agreement The mathematics in this last article looks correct – but I haven`t yet seen any numerical results from the test without a model. Someone tested the latest result of Rolloos, any comment/ideas about it?.

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